Reasonable cause defeats section 78 penalty when service tax was paid and non-payment arose from industry confusion.

Penalty under section 78 of the Finance Act was not sustainable where the service tax demand was accepted and paid, and the delay was explained by confusion in the industry over classification and levy. On those facts, the failure to pay on time was not attributed to mala fide conduct, and reasonable cause was found for invoking section 80. The penalties were therefore set aside.

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Issues: Whether penalty under section 78 of the Finance Act could be sustained when the tax demand was not contested and the non-payment was attributed to confusion in the field, attracting section 80 of the Finance Act.

Analysis: The demand of service tax was accepted and stood paid. The explanation offered was that there was confusion in the industry and even departmental authorities had taken different views on the classification and levy. On these facts, the default was not found to be attributable to any mala fide conduct, and the circumstances disclosed reasonable cause for the failure to pay tax in time.

Conclusion: Penalties imposed under section 78 of the Finance Act were set aside.

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